Consumer debt, credit cards and the small business trap

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Many small business owners rely on personal savings and credit cards for funding their business. The excitement and energy that helped them start might turn into stress and despair when cash is not flowing and debt starts piling up. If you are like most small business owners starting with a brilliant idea and little money, you might be in a double trouble.

You used your personal and business credit cards to the max to solve day-to-day operational issues –buying supplies, and paying for services or miscellanea. You dug into your 401K, life insurance accounts or equity loans to finance startup costs, equipment and/or pay salaries. You asked for personal loans from family members or a business loan from passive investors such as friends or colleagues. Your business and your personal credit are at risk. If this is you, you are trapped into consumer and business debt at the same time.

Getting out of debt in this case is a two-fold problem so I recommend a two-fold strategy. On one hand, make a “reality check” of your business; on the other, negotiate with your debtors. Easy to say but here are some ideas you can try:

Your business

• Evaluate your expenses and decide which ones you can hold off

Make a through inventory of all business expenses. Do not forget your petty cash! See where and how you can cut expenses not essential to the life of your business.

• Shop for new vendors or negotiate prices with your current ones.
• Shop for overhead expenses’ additional discounts; providers are always having “special offers.”
• Hold off all new planned equipment or business expansion investments unless you are 100% sure they will increase business.
• Train current employees to conduct additional tasks or participate in promoting the business. Offer some incentive; train them in word-of-mouth techniques. You never know who can bring you a new customer and it is in their best interest not to lose their jobs!

2. Assess your business with your head, not with your heart
   
   

• Evaluate which products or line of products and services are really bringing you money. Discard those that don’t –even if you personally love them-, and enhance those that do. Look for additional services or products under those categories.
• Evaluate your staff performance and see if you need to make “adjustments.” (I’m not kidding!) Keeping people on payroll that are not producing enough to pay their salary is your first red flag and you need to act upon it. You business livelihood depends on productive people, especially if you have a very reduced staff.

Your debt -including your credit cards

1. Assess your debt situation and decide which fires you need to put out first

Write down a list of outstanding amounts starting with your most pressing debts. Then go down one by one.

• Include the total amount of your loans, credit card debt or other debt; the interest rate you are paying on each; and the time of repayment.
• Prioritizing can include starting with the larger debts, or those that are sorely overdue, or those with higher interest rate. All these factors play a very important role in debt accumulation.
• Separate your personal and credit card debt from your business debt.
• Once you see everything in writing, you will be able to set up a possible repayment plan and negotiate with your debtors.

2. Deal with your debtors

We all hate bad news. Your debtors do to. Open communication with your debtors builds trust and credibility so that when bad news comes, they are not caught by surprise and can decide whether or not to cut you some slack.

• Negotiate with your landlord your monthly rent; maybe you can escalate your payments, starting at a lower amount now and compensating the difference in the last year of your contract.
• Work on consolidating your credit card debt and cut your credit cards in half –really, with scissors!
• Beware of organizations “helping” with debt consolidation. There are good, bad and ugly ones out there. Even if they have a “non-profit” status, check very closely their fees and upfront costs. Read reviews!
• Negotiate with your credit cards directly. Do not give up! Ask for a manager, make your case, pledge your willingness to repay, ask for help, and insist!
• Negotiate with your family members if you owe them money. Offer them an eventual “piece of the pie” if they are willing to wait a little or to become part of your business. You might be able to replace a non-performing employee with a family member that has his/her best interest in mind.
• Same with your business debtors, negotiate a part of your business or a percentage of potential profits. Most entrepreneurs do not like to share their business vision but a new perspective might be helpful in this case.
• Reach out to SBA local agencies to get free help and counseling for your business.

You can also follow these same tactics at home –holding off unnecessary expenses, assessing your family budget with your head, evaluating your debt, and asking your family members to cooperate.

One big mistake a lot of parents make is not to include their children in problem solving situations. Do not pass onto them your concerns, but ask them to help save expenses and sacrifice a little, which is a lesson for life!

Mostly, do not despair. At the end of the day, you need your best thinking and a clear mind to lead your small business. Worry gives us a false sense of control and it is really useless. Taking steps to solve the problem is your best bet.

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